The Truth about Fannie Mae and Freddie Mac

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Fannie and Freddie Boards did not consent…because they never met…!

Fannie Mae and Freddie Mac’s Boards of Directors did not consent to conservatorship. Claims of Board meetings where they consented to conservatorship never happened.

The Government made several claims regarding why they initiated the conservatorships of Fannie Mae and Freddie Mac in September 2008. In Henry Paulson’s book, On the Brink, Paulson asserts that the companies were undercapitalized and operating in an unsafe and unsound manner. However, if you carefully read Paulson’s book it is clear these charges were trumped-up or fabricated.

In fact, this passage in the book debunks the “unsafe and unsound” claim:

Complicating matters, FHFA had recently given the two companies clean bills of health based on their compliance with those weak statutory capital requirements. Lockhart was concerned — and Bob Hoyt, Treasury’s general counsel, agreed — that it would be suicide if we attempted to take control of Fannie and Freddie and they went to court only to have it emerge that the FHFA had said, in effect, that there were no problems.

Paulson knew that the claim of undercapitalization was weak. Indeed, a recent forensic accounting review proves that Fannie Mae was not undercapitalized. I am unaware if a similar review was conducted on Freddie Mac’s capitalization level in 2008.

The point is that Paulson knew his case for conservatorship could not be substantiated. The only way he could justify placing the companies into a government-controlled conservatorship was if the companies consented to this action. In order for the companies to consent, the boards of directors would have had to meet and vote on the action.

The boards of directors never met. I’ll repeat this point – THE BOARDS NEVER MET!

Hopefully, this revelation is as shocking to you as it was to me when I realized it. It would be impossible for Fannie Mae and Freddie Mac to consent to conservatorship if their boards of directors never met to vote on the action.

James Lockhart made this statement during his September 7, 2008 announcement:

The Boards of both companies consented yesterday to the conservatorship. I appreciate the cooperation we have received from the boards and the management of both Enterprises. These individuals did not create the inherent conflict and flawed business model embedded in the Enterprises’ structure. I thank the CEOs for their service in these difficult times.

And here is what Paulson said on September 7 in his official announcement:

Throughout this process we have been in close communication with the GSEs themselves… I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither.

These statements are false. The boards did not consent…they never met. Plus, there was no cooperation between the government and the companies.

The facts proving the boards of directors did not meet will be presented in a moment, but first review what Paulson wrote in his book that proves the statement in the announcement was a lie. Here is how Paulson describes the process:

“(speaking with President Bush)…‘we’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor.’

I’m a straightforward person. I like to be direct with people. But I knew that we had to ambush Fannie and Freddie. We could give them no room to maneuver. We couldn’t very well go to Daniel Mudd at Fannie Mae or Richard Syron at Freddie Mac and say: ‘Here’s our idea for how to save you. Why don’t we just take you over and throw you out of your jobs, and do it in a way that protects the taxpayer to the disadvantage of your shareholders’

The news would leak, and they’d fight…”

Paulson admits in his book that there was no cooperation – on the part of the government!

Why did Paulson feel the need to lie about Fannie Mae and Freddie Mac’s boards of directors consenting to conservatorship? Perhaps he realized that no other condition was met under the law – the Housing and Economic Recovery Act of 2008 (HERA). Paulson was aware of this law because he pushed it through congress (and some people assert he lied during that process, as well).

Under HERA, the Federal Housing Finance Agency (FHFA) was authorized discretionary authority to place Fannie and Freddie into conservatorship if one of the following conditions existed:

(A) ASSETS INSUFFICIENT FOR OBLIGATIONS

(B) SUBSTANTIAL DISSIPATION

(C) UNSAFE OR UNSOUND CONDITION

(D) CEASE AND DESIST ORDERS

(E) CONCEALMENT

(F) INABILITY TO MEET OBLIGATIONS

(G) LOSSES

(H) VIOLATIONS OF LAW

(I) CONSENT

(J) UNDERCAPITALIZATION

(K) CRITICAL UNDERCAPITALIZATION

(L) MONEY LAUNDERING

None of the above conditions existed when the US Treasury Department conspired with the Federal Reserve and FHFA to illegally takeover Fannie and Freddie. Paulson was aware none of these conditions existed so he resorted to lying to get what he wanted.

To prove that the boards of directors never met to vote on conservatorship a comparison of what Paulson wrote in On the Brink needs to be made with the official record of Paulson’s activities.

Paulson claims in his book that he met with a small group of Fannie and Freddie executives on Friday, September 5 in advance of full boards of directors meetings on Saturday, September 6. However, the official record shows no meetings occurred on September 5, rather only the two meetings on September 6. And these meetings on Saturday were not with the boards of directors as Paulson states in his book, but rather meetings with a few company representatives. Again, this is very important, as the only way to have consent is to have an official board of directors meeting where they would vote for or against conservatorship.

The following description of events is from Paulson in On the Brink:

Thursday, September 4, 2008

From On the Brink:

“Thursday evening, Jim put in calls to the CEOs of Fannie and Freddie, summoning them to a meeting Friday afternoon that Ben and I would attend at FHFA’s headquarters on G Street. (Jim didn’t speak directly to Mudd until Friday morning.) We arranged for the first meeting to start just before 4:00 p.m. so that the market would be closed by the time it ended. We decided to lead with Fannie Mae, figuring they were more likely to be contentious.”

Friday. September 5, 2008

From On the Brink:

Our first meeting was with Fannie in a conference room adjacent to Jim’s office. We’d asked both CEOs to bring their lead directors. Fannie chairman Stephen Ashley and general counsel Beth Wilkinson accompanied Mudd. He also brought the company’s outside counsel, H. Rodgin Cohen, chairman of Sullivan & Cromwell and a noted bank lawyer, who’d flown down hastily from New York.

We ran through the same script with Freddie, and the difference was clear: Where Mudd had been seething, Syron was relaxed, seemingly relieved. He had appeared frustrated and exhausted as he managed the company, and he looked like he’d been hoping for this to happen. He was ready to do his duty—like the man handed a revolver and told, “Go ahead and do it for the regiment.”

He and his people mostly had procedural issues to raise. Would it be all right for directors to phone in or would they have to come in person? How would the news be communicated to their employees?

Saturday September 6, 2008

From On the Brink:

From that call I went into a noon meeting that lasted perhaps an hour with the board of directors of Freddie Mac. In the afternoon, around 3:00 p.m., it was Fannie Mae’s turn. To avoid publicity, we switched from FHFA headquarters to a ground-floor conference room at the Federal Housing Finance Board offices, a few blocks from Lafayette Square.

Sunday September 7, 2008

Press conference – announcement of conservatorship

Here is further proof that Paulson claims meetings occurred over two consecutive days with Fannie and Freddie:

Just like the initial meetings the day before, the session with the Freddie board went much easier than the one with its sister institution.

Fannie’s directors, like its management, wanted to differentiate their company from Freddie, but we made clear we could do no such thing.

The official record of his events refutes Paulson’s fabricated version from On the Brink.

From the official account, one can find the relevant Fannie and Freddie references – phone calls and meetings:

Friday, September 5, 2008:

It is apparent that every event for Paulson on this day related to Fannie and Freddie, however the following meetings are of note:

3:00 – 4:00 pm GSE meeting (with a few Freddie Mac executives – Richard Syron and a few others similar to the Fannie Mae small meeting)

Sunday September 7, 2008

11:00 – 11:45 am Press conference – announcement of conservatorship

The record clearly indicates that meetings with Fannie and Freddie executives and board members did not occur over the course of two days. Though the official record purposely lacks detail on the attendees of the September 6 meetings, it is clear that these meetings are the ones that Paulson went into detail describing in his book – the smaller meetings…not with the full board of directors.

I believe the official record was intentionally vague as to the attendees at the Saturday meetings as if it provided full detail it would show that the meetings were with a small contingency of executives that lacked the authority to provide full board consent.

What is unmistakable is that meetings with Fannie and Freddie did not occur on both Friday and Saturday. It’s a complete fabrication to fit Paulson’s narrative and to justify the illegal government takeover of two private companies.

If the Government seizure was illegal, then everything that followed literally compounds a felony.

Obviously, the assessment of events is my own opinion. But, you do have to question why Paulson claims to have had meetings on both Friday and Saturday, when the official record proves meetings only occurred on Saturday.

Here’s how Paulson describes it in the book, though not sure if it’s truthful:

He was calling from someplace on the road. He had learned about the moves we’d made and wanted to talk about what it meant. I didn’t know him very well at all. At my last official function as Goldman Sachs CEO before moving to Washington, I’d invited him to speak to our partners at a meeting we’d held in Chicago. The other main speaker at that event had been Berkshire Hathaway CEO Warren Buffett. I would, in fact, get to know Obama better over the course of the fall, speaking to him frequently, sometimes several times a day, about the crisis. I was impressed with him. He was always well informed, well briefed, and self-confident. He could talk about the issues I was dealing with in an intelligent way. That night he wanted to hear everything we’d done and how and why. I took the senator through our thinking and our tactics. He was quick to grasp why we thought the two agencies were so critical to stabilizing the markets and keeping low-cost mortgage financing available. He appreciated our desire to protect the taxpayers as well.

“Bailouts like this are very unpopular,” he pointed out.

I replied that it wasn’t a bailout in any real sense. Common and preferred shareholders alike were being wiped out, and we had replaced the CEOs.

“That sounds like strong medicine,” Obama said. He was glad we were replacing the CEOs and asked about whether there had been any golden parachutes.

I told him we would take care of that, and he shifted the conversation to discuss the broader issues for the capital markets and the economy. He wanted to hear my views on how we’d gotten to this point, and how serious the problems were.